PSNC 2016: Washington Insights

The 2016 PLANSPONSOR National Conference discussion of
legislative, regulatory and judicial developments in the retirement plan
industry was strongly focused on litigation.

Which makes sense, as David Levine, principal with Groom Law
Group, Chartered, explained that Washington and the courts are intertwined.
“Laws are passed, then plaintiffs’ lawyers search for issues,” he said. “Laws
create avenues for compliance, enforcement and litigation.”

And there is more Employee Retirement Income Security Act
(ERISA) litigation than there’s ever been, added Jamie Fleckner, a partner with
Goodwin Proctor LLP. He noted that, in the past year in particular, there has
been a huge uptick in litigation focused on plan fees and types of investments.
He said the factors contributing to this include the Supreme Court decision in Tibble
v. Edison, which contemplated why a large plan sponsor would use retail
rather than institutional shares of mutual funds; the Supreme Court taking away the statute of limitations defense,
saying plans have an ongoing duty to monitor investments; and the large amount
of money involved for plaintiffs’ lawyers. “Plaintiffs’ lawyers get about
one-third of settlements,” he said.

Lisa Barton, a partner at Morgan, Lewis & Brockius LLP,
said she spends considerable time encouraging plan sponsor clients to meet
quarterly about investments and make sure they are having effective
discussions, which they then document. She noted that litigation is affecting plans of all sizes. Plan
sponsors need to set up a committee to monitor funds, share classes and fees.

“You should adopt a process, and make sure you follow it,”
added Levine. “‘Set it and forget it’ doesn’t make sense for anything regarding
retirement plans.” He also observed that plan sponsors shouldn’t spend time—and
committee meeting minutes shouldn’t reflect—discussing “how not to get sued.”

According to Barton, it is also important to explain fees to
participants. “Let them know, ‘If you’re in these funds, you will be paying
these fees, but if you are in these other funds, you won’t,’” she said.

NEXT: Flavors of litigation

Fleckner pointed to a common theme in the existing
retirement plan litigation: Large plans should be using institutional shares
rather than retail shares. “But the institutional shares may not ultimately be
cheaper, because there is revenue sharing,” he said. “That’s one reason it is
important to document the process of selection. Plaintiffs’ lawyers do not know
the processes.” In other lawsuits, there has been a perception of conflicts—the
plan uses the recordkeeper’s proprietary funds, or is doing other services for
the plan sponsor. According to Fleckner, he is seeing plan sponsors that make
changes to their plans targeted in lawsuits because plaintiffs’ lawyers say,
“Aha, you must not have been following your fiduciary duty before.” He told
attendees not to fear making changes, because to monitor and make changes is
their duty.

Fleckner said he also sees the potential for litigation as
plan sponsors try to “institutionalize” their defined contribution (DC) plans
to make them more like defined benefit (DB) plans, especially if plan sponsors
have both plan types and the same committee for both. They may be questioned as
to why better or more effective investments had been used in the DB plan.

If there are changes made, the messaging to participants is
important, said Barton. “Sometimes plan sponsors want to say, ‘Look at this
great change we made,’ but employee-friendly messaging could make employees
think there was a problem before,” she told attendees.

Regarding other types of litigation, Levine said that courts
are split among the spate of “church plan” cases in which participants argue
that an entity’s “church plan” fails to meet the definition of ERISA and
therefore is subject to ERISA funding rules. He noted that many courts are rejecting
the Internal Revenue Service’s (IRS’) interpretation of “church plan” under
ERISA. And while it will take a long time for these cases to weave through the
litigation process, he definitely thinks this issue will result in further
legislation.

Finally, recognizing that another plan discussion at the
conference would focus on the fiduciary rule, Levine said that the rule could
create an opportunity for litigation against plan sponsors as well. “Your
education and service contracts with providers will change,” he pointed out.
“Right now, you should focus on how you plan to review these new contracts,
because if you don’t, and something goes wrong, the Department of Labor [DOL]
could ask why you agreed to the contract.”